Question

“One of the means by which the interests of the shareholders and other parties interested in the affairs of a company can be satisfied is the production and availability of comprehensive information about the financial and other standings through an annual report”.

(a)        Identify and briefly discuss each of the components of a financial statement.

(b)        Describe the functions of the auditor’s reports and the types of opinions in an annual report.

(c)        An annual report consists of some other basic reports that are qualitative in nature. Enumerate and examine the reasons for the inclusion of such reports in the annual report of a company.

Answer 1

An annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance. major inclusions in an annual report are:

• General corporate information
• Operating and financial review
• Director's Report
• Corporate governance information
• Chairperson's statement
• Auditor's report
• Financial statements, including
  • Balance sheet also known as Statement of Financial Position
  • Income statement also known as profit and loss statement.
  • Statement of changes in equity
  • Cash flow statement
• Notes to the financial statements
• Accounting policies

a) Components of Financial statements

• Balance sheet also known as Statement of Financial Position is the statement which depicts the Financial strenght of the company. Balance sheet gives information about a company's Assets, Liabilities and net worth. It gives the users an idea bout the company's Liquidity, solvency and Returns on equity etc.
• Income statement also known as profit and loss statement is the statement which gives information about company's profitability. It consists of comapny's costs and profits at different stages of production and sales. It informs the user about company's profitabilty and activity.
• Statement of changes in equity is the statement which is very keenly read by the investors and potential investors. It gives the information about changes in equities positions of the company and it's major shareholders (Promoters and others).
• Cash flow statement is another very important statement which gives information about flow of cash in the company through its different activities namely Operating activities, investing activities and financing activities.

b) The purpose of an Auditor's report is to provide an assurance to the users that the accounting data and reports presented to them are free from errors and bias. Auditors have to make various judgmental assumptions in finalizing reports. The audit opinion is a very important part of the audit report because it makes a statement about a company’s financial status to investors.

Auditors have the option of choosing among four different types of auditor opinion reports. An auditor opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four types of auditor opinions are:

1. Unqualified opinion- An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting.
2. Qualified opinion- When an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified or clean report, the auditor may choose to issue a qualified opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status.
3. Disclaimer of opinion- An auditor issues a disclaimer of opinion report, it means that they are not satifsfy with the audit process and are distancing themselves from providing any opinion at all related to the financial statements. The auditors may issue a disclaimer of opinion because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions.
4. Adverse opinion- The final type of audit opinion is an adverse opinion. Auditors who aren’t at all satisfied with the financial statements or who discover a high level of irregularities or material misstatements know that this creates a situation in which investors and the government will mistrust the company’s financial reports. An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud.

c) Directors' report and Chairperson's statement are the reports which are related to more of a qualitative information about the company. These statements are analytical in nature in relation to the financial information presented in the different statement of annual reports. These also give an idea to the investors and other users about the future path and growth possibilities of the company.

These statements are important to be included in the annual report as firstly they give the views of the managent to the users related to the financial statements and secondly they convey the vision of the management with respect to future. Apart from above it helps some users, who are unable to read the financial statements, understand the company's position and situation.